* Evangelical ministers plan to endorse candidates * Churches intentionally putting tax-exempt status at risk * Catholic Church launches campaign against Obama By Nanette Byrnes June 21 (Reuters) - Pastor Jim Garlow will stand before congregants at his 2,000-seat Skyline Wesleyan Church in La Mesa, California, on Sunday, Oct. 7, just weeks before the U.S. presidential and congressional elections, and urge his flock to vote for or against particular candidates. He knows such pulpit pleading could endanger his church's tax-exempt status by violating IRS rules for a 501(c)(3) charitable organization. A charity can take a position on policy issues but cannot act "on behalf of (or in opposition to) any candidate for public office." To cross that line puts the $7 million mega-church's tax break at risk. Even so, Garlow not only intends to break the rules, he also plans to spend the next four months recruiting other pastors to do the same as part of Pulpit Freedom Sunday. On that day each year since 2008, ministers intentionally try to provoke the IRS. Some even send DVD recordings of their sermons to the agency. Last year, 539 pastors participated. This year organizers expect far more. Participants want to force the matter to court as a freedom of speech and religion issue. "I believe we're on the early stages of the next great awakening," Garlow told his congregation last year. "We're going to see it just sweep across this nation." The situation is fraught with peril for the IRS, which needs to be seen as apolitical. When it cracks down on political activities proscribed by the 501(c)(3) regulations, it is inevitably branded as partisan. When the target is a church, mosque or synagogue, enforcement puts two fundamental American values at odds: freedom of speech and the separation of church and state. Although the agency has enforced the tax-exemption rules against churches in the past, it has so far ignored the provocations of Freedom Sunday. The IRS has also been silent about the increasingly aggressive political activity of the U.S. Catholic bishops, who have called for their own Fortnight for Freedom this week. Masses, rallies, and parish bulletins are being mobilized against the Obama administration's healthcare regulations on contraceptives. The result of agency inaction, according to tax experts and former IRS staffers, will be a lot more electioneering by leaders of the faithful, in local races as well as national, and to the benefit of Democrats as well as Republicans. "It will get worse unless the IRS takes action, and they seem reluctant," said Nicholas Cafardi, dean emeritus and professor of law at Duquesne University and the longtime lawyer for the Catholic diocese of Pittsburgh. Cafardi called the current state of affairs "toxic" in its mingling of the two worlds. Many religious leaders do not support the trend toward more political involvement by organized religion and worry it will undercut their moral authority. BILLIONS IN TITHES The money involved is enormous. Combined, federal tax breaks on donations to churches and exemptions from state and local property taxes likely add up to something on the order of $25 billion in lost revenue each year. Last year churches received $96 billion in tax-free contributions, according to estimates compiled by the Center on Philanthropy at Indiana University. Unlike other types of charities, churches do not have to file financial statements with the government. There are only rough estimates of church endowment or investment income, which is also tax-free and believed to be larger than annual contributions. Using tax data from the U.S. Congress's Joint Committee on Taxation and data on giving to churches from the Indiana Center, a Reuters analysis found that tax breaks on church giving shaved $12 billion or so from total U.S. tax collections in 2011 and approximately $145 billion over the last decade. The property tax break is probably even bigger. In their 2011 book "Politics, Taxes, and the Pulpit," law professors Nina Crimm and Laurence Winer calculated that houses of worship received $12.7 billion in property tax exemptions on $685 billion of property in 2006, a figure large enough to have played a role in city and state budget deficits of recent years. In big cities the numbers can be dramatic. New York City's 9,500 churches, synagogues, and mosques, for example, will avoid $626.9 million in property taxes this year thanks to their tax-free status, according to the city's Independent Budget Office. Like most of California, La Mesa, where Garlow's Skyline Church is located, has suffered a steep drop in property tax collections, forcing municipal staff cuts and a sales tax increase. Skyline's campus, which is assessed at $7.3 million and cost a reported $27 million to build, is almost entirely tax-exempt, according to the county assessor's office.

AN ERA OF ENFORCEMENT The IRS has not always been quiet. In 1992 it went after the Church at Pierce Creek in Binghamton, New York, which had bought full-page newspaper ads opposing then-Democratic presidential nominee Bill Clinton. The church lost its IRS tax-exempt status but continued operating, changing its name to Landmark Church when it moved into central Binghamton several years ago. Pastor Dan Little said the church never lost its property tax break. At the end of the year, Landmark gives people a record of their giving just like other churches, he said, leaving it up to them and their accountants to decide tax matters. "We just never have made any big issue of it," said Little, who continues to preach about politics and morals. In 2004 the IRS created a dedicated enforcement program focused on political activity by churches and other nonprofits. Called the Political Activities Compliance Initiative (PACI), it investigated in the 2004, 2006 and 2008 election cycles 80 instances where church officials were alleged to have endorsed a candidate during services. According to IRS tallies made public after each election, the majority of the PACI complaints were upheld and settled with a warning that the organization comply with the ban on political activity. The IRS did not respond to Reuters questions about its enforcement activities in recent years, or explain why they seem to have ended abruptly in 2009.

BACHMANN ENDORSEMENT A KEY IRS church audits seem to have halted entirely in January 2009. That was when Living Word Christian Center in Brooklyn Park, Minnesota, successfully appealed an IRS audit. In question were an endorsement of Republican Michele Bachmann for Congress by pastor James Hammond and financial deals that may have benefited him personally, a violation of IRS rules. IRS audits of churches must comply with strict rules designed to prevent undue governmental pressure. One is that a high-level IRS or Treasury Department official must authorize the audit. In the Living Word case, the U.S. District Court in Minnesota ruled that the IRS staffer who authorized the audit did not qualify. In July of that year, Minnesota's Warroad Community Church was told by an IRS official that it was closing its 2008 examination of the church "because of a pending issue regarding the procedure used to initiate the inquiry." (Reuters obtained a copy of the letter from the Alliance Defense Fund, which was representing Warroad in the audit.) Other churches that had been under IRS review received comparable letters, according to their lawyers. The IRS stopped publishing the results of its PACI initiative. Three years later the IRS has yet to come up with a new set of church audit rules, making it impossible, experts say, for the agency to pursue such examinations. Former staff insist that being seen as weak on enforcement of the law would be more damaging to the IRS than any allegation of partisanship would be. Still, tight budget may have made it easy to put off tackling 501(c)(3) disputes. Others argued the agency may worry it could lose a court case over revocation on constitutional grounds, and that by avoiding such a test they may preserve the deterrent power of having the law on the books. Whatever the reason, IRS inaction has effectively thwarted the evangelicals' efforts to force the matter in court.

BISHOPS TAKE AIM At the United States Conference of Catholic Bishops meeting last week in Atlanta, bishops vowed to keep up their criticism of Obama administration policies on employer-provided birth control and other controversies. "The first principle is that American citizens don't lose their freedom of religion or their freedom of expression when they become bishops," said Cardinal Francis George of Chicago. As to what is and is not acceptable to say about candidates for office, "the guidelines are broader than some may interpret them," George told Reuters at the conference. In follow-up email correspondence, he declined to say whether he thought the IRS rules constrained free speech or whether he would be willing to forgo the church's tax exemption so clerics could speak out without restriction. The meeting offered no public discussion of an April sermon by Illinois Bishop Daniel Jenky that has been vigorously debated in the local and the religious press and which many think violated the prohibition against opposing a candidate for office. The sermon has drawn a request for an IRS investigation by a watchdog group. After asserting that Obama, "with his radical, pro-abortion and extreme secularist agenda" seemed to be on an anti-Catholic path similar to Hitler and Stalin, Jenky exhorted all Catholics to "vote their Catholic consciences" this fall. Do the people in congregations follow such instructions? Only 18 percent of those polled by the Pew Research Center in January said the endorsement of a candidate by their minister, priest or rabbi would sway their vote. Seventy percent said it would make no difference. A second Pew study this spring found that most parishioners would prefer their religious leaders steer clear of electioneering, with Catholics among the most adamant.